FAIR GAME; Looking Twice, Or Not, At Take-Two

By GRETCHEN MORGENSON

Published: October 29, 2006

INVESTORS in Take-Two Interactive Software, a video game maker, seem to view it as corporate America's answer to the lovable rogue. Never mind that both the Securities and Exchange Commission and Robert M. Morgenthau, the Manhattan district attorney, are investigating the company's stock option grants, that it has not filed a financial statement with regulators since June, that its founder resigned, that the Nasdaq may soon delist its shares and that its business seems to be faltering.

You need to be brave to march into that kind of territory as an investor. And on this particular Sunday, observe a pair bold enough to display such courage: Take-Two's largest shareholders, Fidelity Management and Research and Oppenheimer Funds. Neither fund would discuss its Take-Two stakes, but both companies -- who have fiduciary duties to invest their shareholders' money prudently -- added to their Take-Two stakes in the latest quarter for which data are available. Oppenheimer owns almost 24 percent of Take-Two's shares; Fidelity owns 15 percent.

Take-Two is best known for Grand Theft Auto, its shoot-em-up, sex-laced video game. The company has tried to diversify into sports games -- less controversial -- but results have disappointed. Notwithstanding a recent rally, the stock is down 21 percent this year, and its market capitalization has fallen $267 million, to $1 billion.

The company's biggest holders are clearly true believers. Quite brave. So they may not be concerned about Take-Two's relationship with Alliance Distributors Holdings, a Bronx-based video game distributor. Alliance's shares closed on Friday at 18 cents apiece on the over-the-counter bulletin board market.

Alliance has filed regulatory documents that indicate that Take-Two is among its most important suppliers. Trouble is, Alliance appears to be affiliated with a company that, regulators said last year, figured in a scheme by Take-Two and four of its executives to manipulate the company's earnings six years ago.

In June 2005, the S.E.C. sued Take-Two, contending that it inflated its results by $60 million in 2000 and 2001. One way it pumped things up, according to the complaint, was to ship several hundred thousand video games to distributors, record revenue from the shipments and then take returns of the games in subsequent quarters. According to the S.E.C., Take-Two used this tactic, known as parking, 180 times; the schemes were designed to meet analysts' earnings projections, the commission said.

Without admitting or denying wrongdoing, Take-Two and its executives settled the S.E.C. action in June 2005. Two of the four executives named in the suit were Ryan A. Brant, Take-Two's founder and former chief executive, and Larry Muller, the company's former chief operating officer.

Under the terms of their settlement, the four former executives agreed to pay almost $14 million in penalties, disgorgement and interest. Mr. Brant was barred from serving as a director or officer of a public company for five years. Mr. Muller, who the S.E.C. said was the ''principal architect'' of the parking arrangement, was barred permanently from such service.

In recent years, Mr. Brant was vice president for production at Take-Two. But on Oct. 17, Take-Two said Mr. Brant had resigned from the company for medical reasons. Neither Mr. Muller nor Mr. Brant could be reached for comment.

One of the companies with which Take-Two parked its video games, according to the S.E.C., was Corner Distributors, an electronics retailer based in the Bronx, according to New York State incorporation records. On April 26, 2001, the S.E.C. said, near the end of Take-Two's second quarter, the company shipped some 40,000 video games to Corner, treating the shipment as a sale that generated nearly $1.5 million. The next quarter, less than one month later, Take-Two took back the shipment but concealed the fact that the games were returned goods, the agency said.

Take-Two conducted nine such transactions with Corner, the S.E.C. said. Corner, a private company, was not named as a defendant in the S.E.C. case. Five years later, Corner remains an active company, according to state incorporation records. Regulatory filings also show that Alliance Distributors Holdings appears to be a Corner offshoot; an Alliance phone number is listed in a reverse directory as previously belonging to Corner.

Alliance began life as a publicly traded concern in 2003; it was then known as AllianceCorner, reflecting a $3 million purchase of Corner's inventory. Alliance came public through a reverse merger with Essential Reality, a public shell company. In 2004, it dropped ''Corner" from its name and became Alliance Distributors.

According to regulatory filings, Alliance was created through a share exchange agreement between Essential Reality and the three sole shareholders of AllianceCorner Distributors: Jay Gelman, Andre Muller and Francis Vegliante.

Alliance's revenue has exploded in the last two years, but the company has had trouble generating profits. The company reported sales of $58.6 million in 2005, up from $35 million in 2004, but Alliance's net income last year totaled just $186,000. It lost $242,000 in 2004.